Due Diligence
Definition
Due diligence is the comprehensive investigation an investor conducts before finalizing an investment, examining a startup's financials, legal standing, technology, team, market, and customer base. It typically occurs between signing a term sheet and closing the round and can take two to six weeks.
Overview
Due diligence is the verification process where investors confirm that everything represented during fundraising is accurate and that no hidden risks exist. The scope and depth scale with the round size: a $500K seed check involves lighter diligence than a $10M Series A.
Common diligence areas include financial (P&L, balance sheet, cash flow, revenue cohorts, contracts), legal (corporate structure, IP ownership, employee agreements, pending litigation), technical (codebase quality, security practices, infrastructure), and commercial (customer references, churn analysis, competitive positioning).
Founders can significantly accelerate diligence by maintaining a clean data room from day one. This means keeping organized records of: incorporation documents, cap table, all signed SAFEs and notes, financial statements, key contracts, IP assignments, and employee/contractor agreements. A sloppy data room extends timelines and raises investor concerns about operational discipline.
Example
After signing a $5M Series A term sheet, the lead investor conducts 4 weeks of due diligence, reviewing 18 months of financials, interviewing 5 customers, and auditing the cap table.
Related Terms
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